Transportation Deserves Attention as Strategy to Control Energy Costs

November 2010

• Recent trends in the transportation segment of the natural gas industry, coupled with the emergence of new supply options, lead to the realization that transportation strategy is an increasingly important area for analysis for energy buyers looking to reduce natural gas costs.

For much of the past decade, natural gas buyers in Ontario were challenged to deal with high commodity prices for natural gas, and the volatility of those prices. In the last two years, the impact of the recession on gas demand and the influx of new shale gas supply has led to a dramatic decline in commodity prices. At the same time, declining throughput on the TransCanada PipeLines mainline has driven TCPL tolls sharply higher. As a result, transportation and distribution costs now account for a larger share of the burner tip cost of gas than at any time in the last 10 years.

In 2005, the average cost of monthly spot gas at Empress was approximately $8.18/GJ. For a shipper using TCPL long-haul capacity to move gas to the Eastern Zone, gas costs would account for 85% of the landed cost, and transportation would account for 15%. In 2010, with gas prices under $4.00 and the TCPL toll at approximately $1.64/GJ, transportation costs (including compressor fuel) would now account for about 30% of the landed cost of gas, or about twice the proportion of 5 years ago.

It's true that not many gas buyers in Ontario still rely entirely on TransCanada long-haul capacity to acquire their gas supply, so the effect of this swing will be somewhat muted for many buyers. However, it is directionally true for all. The obvious implication is that control of transportation costs deserves greater attention now as a strategy for energy cost control

TransCanada is expected to file a tolls application shortly that could include measures to control its rising long-haul tolls. At the same time, the advent of plentiful shale gas deposits in the Great Lakes region in the US has spawned interest in a number of "open seasons" for new transportation services to connect these shale gas supplies to the gas trading hub at Dawn, Ontario. These new services have the potential to affect the traditional flows of gas through Ontario, and could even result in US gas flowing into Ontario through traditional export points such as Niagara Falls and Iroquois. Buyers will see new supply options.

These trends lead to the realization that transportation strategy is an increasingly important area for analysis for energy buyers looking to reduce natural gas costs.

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